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Saturday 11 October 2008

How to rescue a bank: be firm, be quick, be quiet

Ian Hay Davison draws lessons for the handling of the Northern Rock crisis from his experience as chairman of National Mortgage Bank after its collapse in 1992

Second, the teams, both managers and regulators. Those responsible for the circumstance of the failed bank must be taken off the case at once. Human nature precludes the taking of an objective view about the affairs of an institution in whose activities you have been involved: it is impossible to recognise your own poor judgment. Although it now appears that the relevant managers and supervisors have gone from Northern Rock, their departure happened far too slowly.

Third, the regulatory structure. Moving responsibility for determining interest rates from the Treasury to the monetary policy committee of the Bank has been hailed as the shrewdest move of Gordon Brown’s chancellorship. But at the same time responsibility for banking supervision was moved from the Bank to the Financial Services Authority. The task of supervising banks is an essential part of central banking; central bankers have to step in when things go wrong and the supervisors themselves must have specialist banking knowledge. The central bank must be in close touch with any troubled bank. Above all, unlike the FSA, the central bank is able to use its balance sheet to step in and channel support to any bank in trouble. The conditions for doing so would normally include the cessation of lending, the ring-fencing of retail deposits, the replacement of the management and board and the appointment of new management under the direct supervision of the central bank.

At the first whiff of trouble the natural tendency of any institution is to look to its own, and although the tripartite structure introduced by Gordon Brown allows for full communication between the bodies responsible — the FSA, the Bank of England and the Treasury — in the case of a bank collapse, there will always be a protective instinct that stops the teams being changed and allows optimism full play. I agree with the Treasury select committee: the proper course is to reconstitute the Board of Banking Supervision under the chairmanship of a deputy governor of the Bank.

Ian Hay Davison Is Chairman Of Ruffer LLP.

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